No Change: European Central Bank keeps rates at record low

The President of the European Central Bank (ECB) Mario Draghi said the bank decided not to cut interest rates below its all-time low of 0.25 percent, saying it needs more economic data to take any action.

The ECB president said the bank is alert to the risks of
deflation and is ready to act, but first they would need to look
at high volatility in emerging markets and understand whether
it’s a broad long-term crisis.

“The ECB still needs to look at the GDP figures for 4Q
2013,” Draghi said in a news conference following the
meeting at the Frankfurt-based institution on Thursday.

The Governing Council in Frankfurt left the main refinancing rate
on hold, counter to widely held expectations they would ease
monetary policy at today’s meeting. Also untouched are the
marginal lending rate (0.75 percent) and the deposit rate (0
percent).

“Even though we have signs of gradual recovery, prices are
still weak,” ECB President Mario Draghi said in Frankfurt on
Thursday. The bank president said the bank is alert to the below
1 percent inflation, but believes Europe is experiencing similar
price drops following the Asian crisis of 1998 and the Lehman
crisis of 2008.

“We are alert to these risks. We stand ready and are willing
to act," said Draghi, saying low inflation poses a great
risk for recovery and debt in the euro zone.

Deflation worries

Inflation is at a four-year low, even after the 24-member
Governing Council cut rates to record lows in November. Surprisingly low inflation
of 0.7 percent in January is still far below the bank’s goal of 2
percent.

“Is there deflation? The answer is no,” Draghi said,
adding though “protracted inflation is a risk”. Draghi
pointed out deflation exists in the euro zone’s austerity program
countries – Spain, Ireland, Portugal, and Greece- where wages and
prices are low.

“Primarily inflation is driven by food and energy prices. The
second could be weak demand, for example, low unemployment,”
Draghi said.

How low?

Draghi is convinced demand is getting stronger, not weaker. He
also drew a comparison to the US, and said inflation rates in the
EU aren’t much lower in the US, whose state of recovery is
“much more advanced” than Europe’s.

Record low interest rates have been paired with extra cash
liquidity measures in the banking system, as well as extra
government bond purchases, but the Central Bank’s policy has
failed to inspire growth in the real economy.

Monetary policy is applied across all bloc member states, which
currently show many different stripes of economic strength.
Germany, the euro zone’s strongest economy, only expanded 0.4
percent in 2013 and many euro economies are still contracting,
even France.

Lower interest rates would turn off investors who are looking to
make high returns on equity investments and assets.

While the US and Europe drove their interest rates to nearly
nothing, emerging markets kept interest rates high, which has
attracted a lot of capital.

After the financial crisis hit in 2008 and the closing of Lehman
Brothers pushed the financial sector into panic mode, the US and
European Central banks, lowered interest rates to record lows to
keep the economy afloat.

As the US begins to wind down its bond-buying program, a lot of
investors are shifting back to America in anticipation rates will
go up.

Europe’s recovery could be derailed by its high exposure to emerging markets, which are
at the moment turbulent as investors sell off assets and equity.